Hey everyone, it’s Andrew Lanoie. On today’s episode of the impatient investor, wall street is stumbling.
So last year, wall streets on massive sell-off and the market plummeted almost 620 points. As the Dow tumbles Cryptocurrencies keep running against huge obstacles. In the modern connected age following the herd may not only be ill- advised, but also downright dangerous in both social and financial matters. On the social side, connectivity and social media have spawned various fads and crazes of varying levels of stupidity and danger with some fads even resulting in deaths. Some of the most unbelievable stupid recent stunts have included the duct tape challenge, the car surfing challenge and the choking challenge. Just to name a few.
So what explains this mass madness? Charles McKay has a great quote from his book, extraordinary popular delusions and the madness of crowds. Here’s what the quote says, “men, it has been well said think in herds. It will be seen that they go mad in herds while they only recover their senses slowly one by one.” This book was written in 1841 and the premise of McKay’s book is that mass delusions can explain momentous irrational social and economic events throughout history. On social matters. McKay discusses the influence of general hallucination behind hysterias like the witch hunts and alchemy. The case studies in McKay’s book demonstrating the madness of crowd behavior have their analogs in modern times. Although his book touched on social subjects, it was his insights on the economic bubbles that proved to be the most accurate and still resonate today.
His discussion on economic bubbles and specifically the Dutch tulip mania of the early 17th century, have their analogs in a variety of modern economic
bubbles. According to McKay, during this bubble, speculators from all walks of life bought and sold tulip bulbs and even futures contracts on them. Allegedly some tulip bulb varieties briefly became the most expensive objects in the world during the 16 hundreds. Mass delusion was the only explanation for the tulip bubble. The tulip bubble highlighted the gullibility of human beings, particularly in crowds before you scoff at the gullibility of the 17th century counterparts, look no further than two recent modern bubbles to find their contemporaries. First, the dot com bubble of the early two thousands and second the mortgage back securities bubble of the mid two thousands both great examples and you’d sorely mistaken to think that this mass delusion only affected the uneducated investor. On the contrary technology financial end government leaders at the time of these bubbles were all subject to the same mass delusion as the general public.
Remember president George W. Bush suggesting that the social security administration should be able to invest security funds in the stock market during the dot com boom. These two contemporary examples demonstrate that mass delusions are truly a collective in nature. No one at any level is immune and no era is immune from mass delusions. As there is a bubble developing as we speak, both in the stock market and the cryptocurrency bubble. Like the tulip bubble, there is no rational explanation for either bubble with stock prices far outstripping underlying economic values and principles and cryptocurrencies like Bitcoin possessing no intrinsic value.
These wall street bubbles of the recent end distant past highlights the parallels of herd mentality. Get investors continue to throw money at wall street and also continue to fuel present day bubbles. Why be a part of this collective madness? Interestingly, despite touting the efficiency of markets, wall street recognizes the underlying rationality and gullibility inherent in herd mentality. In other words, wall street knows mass delusion is real. Do you want proof? Wall street is even attempting to gauge this irrationality to predict potential crashes and booms. CNN money has a fear and greed index that gauges general investors skittishness to predict potential drops and booms. Investopedia also has Investopedia anxiety index, which is sponsored by JP Morgan asset management. Despite the volatility of wall street and its hypersensitivity to mass delusion and irrational behavior, millions worldwide continue to skew their investment and retirement portfolios heavily with investments, highly correlated to wall street like stocks, bonds, derivatives, mutual funds on either their own or through brokers or retirement accounts including 401k’s and IRA’s. In an instant, the value of these investments can be wiped out for no rational reason other than what could be explained by collective madness.
Nobody likes dealing with mannequin individuals, so why participate in a manic market? Avoid the herds and that collective madness and embrace investments that are completely uncorrelated to wall street. The dramatic rises and falls of herd behavior will never affect those returns or valuations. You have to make a deliberate and conscious decision to avoid the volatility of wall street in mass delusion and invest in an alternative asset class not tied to the broader markets.